In mid April, Ericsson, one of the world’s largest telecommunications equipment providers, secured two major contracts worth US$1.44bn with China’s biggest mobile phone companies: a US$1.3bn deal with China Mobile and a US$140mn deal with China Unicom to support the expansion of their GSM networks were signed.
The Swedish mobile phone company is probably one of the most high-profile companies in Sweden. However, times have not been completely favourable for the company, having announced lower net profits than expected for 2007, and seeing its share price dented by market uncertainty.
Yet, this large-scale deal with China potentially points to a turnaround in the company’s fortunes, as well as illustrates the growing importance of emerging markets, particularly in Asia, for Swedish corporates. According to official government statistics, exports to China for 2007 increased by 7%, whereas exports to the US decreased by 9%.
Hakan von Sydow, senior vice-president, head of trade finance, Sweden at Handelsbanken, also observes: “Our biggest markets in Asia are clearly China and India, but we are also starting to see some potential in the newer very emerging markets such as Cambodia or Vietnam.”
Referring to the increasing appetite for emerging market risk across the Nordic region, Jorgen Lund Lavesen, commercial director – Atradius Northern Europe, comments: “In the more emerging markets such as in the Baltic states we saw double digit growth in the export of goods during 2007.”
But as corporates expand into new territories, they will look for a means of financing their new trade flows. With other forms of financing drying up in light of the global liquidity crisis, trade finance has taken on a new sheen. However, Sweden’s trade finance departments need to ensure they can win contracts by providing an efficient service.
Supporting the supply chain
Sweden’s SEB Bank has a well-established track record in trade finance.
“Trade finance goes hand in hand with SEB. It has a long history within the market. Owner of the bank, the Wallenberg family, has historical links with major Swedish corporates which have now expanded internationally,” remarks Lars Millberg, global head, trade finance, global transaction services, merchant banking, at SEB.
Yet, over the past few years the bank has been changing its approach to its trade finance business.
In 2006, trade finance operations became part of global transaction services (GTS) which incorporates cash management, custody and fund services, as well as trade finance.
In 2000/01, the bank made the decision to outsource part of its trade finance operations to Wachovia in Hong Kong with the aim of improving efficiency of document processing.
Armed with a background in treasury and cash management, Millberg approached his role as head of trade finance from a different perspective from those who perhaps have been long entrenched in the trade market.
Commenting on the changes within the department, he remarks: “One of the biggest achievements this year within the trade finance division is the development of a new methodology – the ‘trade finance value chain’s – that we are now applying to this business.”
He explains that this methodology can be seen as a cash management value chain approach that is now being applied to trade finance operations.
SEB’s research found that for many companies a huge amount of the overall costs for their trade finance business were due to internal processing costs. This led the bank to develop a new holistic attitude to the business, with the aim of developing its advisory services and creating a set of recognised practices that ensure corporates can keep their trade finance costs low. Cutting costs also frees up working capital for the customer.
“For instance, many companies have bad processes in place which are costing them money. SEB can draw on its wealth of experience in trade finance and sell this to its clients,” Millberg remarks.
Rather than creating a new product, SEB has developed a new attitude to its trade finance activities. Millberg asserts this is not a case of style over substance, with the new tactics aimed at saving the client money.
“For example, there are cases where we can help a company cut 10 days out of the time it takes to present letter of credit documents, and this could save them significant amounts,” he remarks.
In practice this ‘methodology’s means that Millberg and his colleagues will sit down with clients and map out the entire process underlying a trade finance transaction. By analysing the whole financing chain, they can pinpoint where there are inefficiencies.
“This kind of approach had tremendous impact within the cash management division. We have now decided to apply this holistic approach to trade,” explains Millberg.
“Customers have jumped at the idea, as when you increase efficiency you lower the cost of trade operations.”
At the early stages of assessing the financing chain, SEB might often use a score card to judge how well-developed the company is in managing its trade finance business, scoring points based on, for instance, the number of document errors it makes, or the IT solutions it has in place.
Following this, SEB would create a business case that supports its suggested changes. This explicitly lays out the benefits and costs a particular initiative would bring. For example, it would state how much money would the company save if it outsourced document preparation or centralised its administration.
Once a business case has been accepted, the suggestions are implemented. However, SEB aims to continue providing necessary support to the client. With that in mind, it has been building up support teams aiming to proactively help customers.
“Rather than only spotting mistakes, the teams will be more proactive in dealing with customers,” Millberg adds.
Alongside promoting this concept, Millberg and his team are readying themselves to launch a new trade finance-related initiative, which Millberg expects will “take the market by storm”, saying that all will be revealed before the end of 2008.
SEB has also been one of the more proactive Swedish banks in its dealings with Bolero, the messaging platform which automates the trade finance process. In February, SEB signed an agreement with Bolero that allows the bank to provide its customers with a multi-bank automation solution to run alongside its existing service offerings.
One of SEB’s competitors in the Swedish market, Handelsbanken, is also watching developments regarding automating trade finance facilities.
Head of trade finance, Von Sydow, comments: “We are looking at investing in an electronic trade finance system, and we are also assessing the potential of getting involved with the TSU [SwiftNet Trade Services Utility].”
Handelsbanken has also taken a slightly different approach to SEB in the running of its trade finance operations.
“Handelsbanken is a decentralised bank, which does differ to some of our competitors. We think this structure enables us to keep in closer contact with our customers,” Von Sydow comments.
He notes that the bank is the only Nordic bank to have a branch in Hong Kong, a useful base to help the bank tap into the increasingly important emerging markets in Asia.
Creating a unique trade finance proposition is essential in the Swedish banking market, which has become highly competitive over the years, a development which has inevitably driven down pricing.
As Von Sydow observes: “In the Swedish market, risk pricing is the main difficulty. If you talk to the banks in London, they will be able to get far better margins than you do in Sweden.”
Generally, Sweden has shown a fair amount of resilience to the immediate fallout from the credit crunch, having limited direct exposure to the US subprime market.
Yet, some of the effects are now starting to trickle through with Handelsbanken reporting first-quarter operating profits above market forecasts, but lower than those reported a year ago.
On April 22 it reported an operating profit of Skr2.92bn (US$493mn), which compares to Skr3.71bn recorded in the first quarter of the previous year. The fall in operating profit is mainly due to writedowns on bond holdings. Despite a slight downturn in business seen across the Swedish banking market, confidence in the trade finance market remains high. Marko Ronnholmen, head of trade finance sales at Swedbank, asserts that during 2007: “Swedbank reached an all-time high in its trade finance activity in Sweden. The increase could be noted in both the import as well as the export-oriented companies.”
He puts this level of activity down to two factors: the continued need for SMEs to reduce the risk of doing business with the emerging markets through using tools such as letters of credit, and the need of larger corporates for supply chain finance solutions that will improve the efficiency of all their trade-related activities.
“We have noticed that the large corporate customers focus on finding ways of replacing traditional trade finance tools such as letters of credit, with open account trade solutions,” Ronnholmen remarks.
“The main reason is to cut administration costs, and to improve their own cash management efficiency. Swedbank has, within its international strategy, decided to follow this development closely and is continuously listening to customer demands, and acting accordingly,” he adds.
To improve its trade finance provision, Swedbank has in the past 18 months upgraded its trade finance back-office solution to provide more rapid handling and will upgrade its customer web service within the near future. The bank has also expanded geographically, opening a branch in Shanghai.
However, despite all these advancements, Ronnholmen also notes that the impact of the liquidity crisis and global market uncertainty is affecting the bank’s customers, with signs that more companies are starting to return to letters of credit, after years of using documentary collections as a primary product.
New face in the market
Although Swedish banks face an unpredictable future, the trade finance market in Sweden has attracted a new player.
Norway’s DnB Nor Bank’s trade finance department has expanded into Sweden, opening up an office in Stockholm as of autumn 2007. The bank itself has been present, in some form, in the Swedish market since 1995.
The bank is retaining its back office operations in Norway, but is running both its front and middle office operations in the Swedish capital. It has also opened an office in Gothenburg, and the bank is planning to set up another office in Malmo in August.
The trade finance office in Sweden is staffed with a team of four, led by Annika Wilhelmsson, head of product management – cash management and trade finance. Elisabeth Norberg is the head of trade finance sales.
Being new to the marketplace, Wilhelmsson remarks: “This year is about marketing our products.”
She adds: “Having a local presence in Sweden is very important to us.
The trade finance business is all about establishing long-term relationships, and it is key to have a front and mid-office in Sweden to stay close to our clients.”
One of the key differences the new Swedish team will face in the Swedish export market, compared to the Norwegian market is the different nature of the two country’s exports. The Norwegian market is dominated by the oil and fish industry, whereas the Swedish market has a greater focus on the export of capital goods, often being exported into emerging markets such as Southeast Asia.
Observing some of the trends in the demand for trade finance in Sweden, Wilhelmsson remarks that there is still a reasonably healthy market for a range of trade finance instruments.
“The Swedish market is getting smaller for structured trade finance. There is still a relatively strong demand for bills of exchange and LCs.”
Norberg adds: “Letters of credit and traditional trade finance tools are still very popular. Exporters want instruments that are safe and liquid, but are of course looking for other types of solutions.”
Prospects for ECA financing
From the perspective of the export credit agency (ECA)-backed finance market, Swedish banks are generally reporting strong deal flows.
“There are few players with balance sheets to use, but we have had no exposure to the sub-prime problems and we are prepared to continue to use our balance sheet for our customers,” asserts Kerstin Gedung, head of export and project finance, in Sweden at Nordea.
In fact, the downturn in the market, and the implications for the larger global players, has opened up a number of opportunities for Swedish banks such as Nordea.
“Some of our global competitors have been struggling to close deals, and in some cases we have taken over deals on which other banks were initially mandated on,” Gedung remarks.
Nordea’s export and project business has remained reasonably untarnished by global credit turmoil, and Gedung reports that although the bank has not seen a significant increase in the number of transactions, the size of deals it has been involved in has grown in recent years.
She adds: “The current economic climate is relatively good for our ECA-backed business. Previously there was far too much liquidity in the market for ECA financing to be regularly required.
“I have seen a real swing in margin levels in ECA financing in recent months.”
Sectors Nordea has seen its strongest level of activity include telecoms, pulp and paper, as well as capital equipment. It has also closed a number of major deals in riskier emerging markets in Sub-Saharan Africa and Latin America.
Gedung comments: “We are active in telecoms financing in Sub-Saharan Africa. Even if the country risk is high, if the structure is strong and the borrower is of good credit quality we can work in these regions, and we have found that telecoms does very well.”
A noteworthy deal is a telecoms transaction in Angola. In January 2008, Nordea acted as sole arranger on a US$21.58mn export finance transaction, backed by EKN and the Swedish International Development Cooperation agency (SIDA), for Angola Telecom. The facility carries a tenor of 8.5 years and supports the export of equipment from Ericsson. It was Nordea’s first transaction in Angola in over 20 years, and one of the first Angolan transactions for EKN for many years.
The bank also closed a telecoms deal in Haiti, another potentially risky emerging market. It is a US$63mn EKN-backed discounting facility to Unigestion Holding in Haiti in support of exports from Ericsson, with Nordea acting as the arranging bank.
The Russian market is also on Nordea’s radar, and it is potentially its most important market, particularly in light of the completion of its acquisition of a majority stake in the Russian bank Orgresbank in March 2007. Previous deals include acting as arranger and underwriter with export credit-backed transactions with Megafon and Vimpelcom in Russia.
Across the Atlantic in Latin America, Nordea has acted as joint mandated lead arranger for Oy Metsí-Botnia in support of the development of a US$1bn pulp and paper mill in Uruguay. The total financing was for US$470mn and the ECA portion was US$230mn, in a deal signed in 2007.
Nordea was lead arranger, co-guarantor and facility agent for a Skr850mn (US$142mn) EKN-backed five-year portfolio risk participation deal for Volvo Financial Services in Brazil. The deal was also signed in 2007.
Emerging market potential
With leading Swedish banks having published their first quarter results, there is a feeling that although the market has not been completely immune to the global credit problems, they have been able to weather any serious problems.
As GTR goes to press, news stories continue to emerge demonstrating the importance of the emerging markets in the growth strategies of Swedish corporates, particularly as demand in traditional western markets could be on the decline.
Among the headlines, high-profile furniture store Ikea is looking likely to invest around US$60mn to set up a new outlet in northern China, to add to its already established Chinese network.
And, where the corporates go, the banks will follow, aiming to win them over with their individual takes on trade finance.